Study Reveals Wild Disparities In American Hospital PricingOn Wednesday, the Centers for Medicare and Medicaid Services released a massive spreadsheet containing a comparison of what hospitals across the country bill for the 100 most popular medical procedures. The document revealed wild disparities in pricing from hospital to hospital. Robert Siegel speaks with Princeton professor Uwe Reinhardt, who studies health care economics, about how the American hospital system evolved this way.

On Wednesday, the Centers for Medicare and Medicaid Services released a massive spreadsheet containing a comparison of what hospitals across the country bill for the 100 most popular medical procedures. The document revealed wild disparities in pricing from hospital to hospital. Robert Siegel speaks with Princeton professor Uwe Reinhardt, who studies health care economics, about how the American hospital system evolved this way.

AUDIE CORNISH, HOST:

From NPR News, this is ALL THINGS CONSIDERED. I'm Audie Cornish.

ROBERT SIEGEL, HOST:

And I'm Robert Siegel.

Earlier this week, the Centers for Medicare and Medicaid Services released a ton of data showing what hospitals across the country bill for the 100 most common medical procedures billed to Medicare. By doing so, they may have boosted scalp replacement into the top 100, considering how much head scratching they provoked. Not only do hospital charges vary widely within the same city, but we are assured that while some hospitals have incredibly high charges, not to worry, no one really pays at that rate, certainly not Medicare, Medicaid or private insurers. So if hospitals are likely to be collecting 40 cents on the dollar for what they're charging, why aren't hospitals going out of business coast to coast?

Well, Princeton economist Uwe Reinhardt, who studies health care economics and blogs about it for the New York Times, has derived what he calls a technical definition of hospital charges. And, Professor Reinhardt, why don't you share it with us?

UWE REINHARDT: Well, my technical definition is that charges is what only a billionaire from abroad would pay a hospital if his wife were not around to control this guy better.

SIEGEL: I see. Thank you for that definition and thank you for joining us. I mean, but isn't a hospital seriously obliged to have some rationale for what it charges, say, for hip replacement?

REINHARDT: No. I don't think hospitals are at all obliged. This is their charge. That's what they say is, how does it relate to cost? They would tell you, we don't really know, but in fact they cannot know because I don't think these charges have any relations to underlying costs. They sort of make them up out of the blue. They might say, well, we got the cost and then multiplied it by five. But what kind of answer would that be?

SIEGEL: An outrageous answer, we multiplied it by five.

REINHARDT: But that's what it is. You can be sure it's very, very high. These charges are completely fictitious. And you really have to wonder, why are they still there? I mean, one could imagine a world in which the hospital industry with concert with government agreed on a nomenclature of procedures and services and then say everyone sort of sets their charges.

SIEGEL: One example you've noted is Las Colinas Hospital in Texas. For a joint replacement, they would ask $160,000.

REINHARDT: Well, that's the charges. And if anyone actually ever paid them, their jaw would drop open because they don't expect to get that at all. Medicare, for example, might pay them a seventh of that. Aetna or WellPoint might pay them 30 percent of that charge. This is a completely fictitious list price of which they negotiate with private insurers. Now, Medicare doesn't even look at these charges other than to say, you must report them to us, but you must also report to us your actual costs, and then we can divide one by the other and we get so-called charge-to-cost ratio for you.

SIEGEL: But, Uwe Reinhardt, you said it might be a good idea to develop some common nomenclature of all procedures and figure out what they cost. There was a serious effort in that direction, wasn't there, earlier in the hospitals?

REINHARDT: Well, Medicare does actually know what it costs because originally the Medicare case payment were based on what it actually cost the hospital to produce the care. And then over time, what happens is when Medicare observes the hospital profit margins to rise, Medicare says, OK, then we can pay a little less because the private insurers are paying so much more. And this is called the cost saved.

I actually, personally, don't believe that's how this really works. What really happens is in some markets, private insurers don't have market power. And so the hospitals can charge them a lot more than their costs, maybe 30 percent more. And when Medicare observes that and say, look at the total margin hospitals make, Medicare says, well, maybe this time we can pay a little less. But my preferred approach would be that all the payers - Medicare, Medicaid, private insurers - would jointly negotiate with all the hospitals in the region a common fee schedule and then everyone would pay that.

SIEGEL: Is there another market you can think of in which apart from practices of discriminatory, predatory pricing, that the same good or service can cost consumer B a fraction of what it costs consumer A or consumer C, depending on what kind of insurance they have or how rich they are?

REINHARDT: Well, I mean, if you go on an airplane, the person sitting next to you on an airplane probably paid a much different price for that fare than you paid. It depends who you are, whether you're a businessperson, whether you bought it 30 days ahead of time and so on. This is called price discrimination. Hotels do it. Airlines do it. But in no other market is it the case that the customer doesn't even know what they're going to get billed. It's just an unseemly system. You cannot go on the Web and find out if you need a hip replacement what a hospital will charge you for that. You can't get that.

So, I say it's like blindfolding people and then shoving them into Macy's or Lord and Taylor's and say, go and shop efficiently for a shirt. You are looking for a man's shirt. And you may come out with ladies' underwear because you can't see nor can you see the price. The way American hospitals price their services, to me, is a source of amusement, frankly. But if you are uninsured and middle class, it's not funny.

SIEGEL: Uwe Reinhardt of Princeton University, thank you very much for talking with us.

NPR transcripts are created on a rush deadline by Verb8tm, Inc., an NPR contractor, and produced using a proprietary transcription process developed with NPR. This text may not be in its final form and may be updated or revised in the future. Accuracy and availability may vary. The authoritative record of NPR’s programming is the audio record.